What is Cosmos?
|— The Cosmos network’s aim is to combine several blockchains in a single hub|
— Its native asset, ATOM, can be delegated to validators to earn passive rewards
— When delegating your ATOMs, these are locked and cannot be used for transactions
— If you stop your delegation, your ATOMs will remain locked for 21 more days
— If the validator you delegate to misbehaves, you can lose a small part of your delegated ATOMs through an event called slashing
We’ve recently added Cosmos to the ranks of crypto assets directly manageable through Ledger Live, including its unique staking protocol! A great question, however, is what makes it so unique. In this article, we’ll go over the specifics of Cosmos and explain what it is.
Cosmos: the internet of blockchains
Cosmos is a rather unique blockchain, which is powered by its native cryptocurrency known as Atoms. The network’s goal is to combine several blockchains into a single hub. This’d mean that other blockchains can connect to it – and as such with each other indirectly. The Cosmos Hub is the part that connects all of these different blockchains together in a single network. Due to its interconnectivity, Cosmos is often referred to as the internet of blockchains.
For its consensus mechanism, Cosmos makes use of a system based on validators and delegations. Tendermint is responsible for the network and consensus used in the Cosmos Hub. Let’s take a closer look into how this works for our users.
Validators and the delegation system
The consensus mechanism is based on validators being chosen to create the next block for the Cosmos blockchain. They are then rewarded for their work in Atoms. The validators that operate in the Cosmos network are chosen by all holders of Atoms. They can choose to delegate their assets to a validator. By doing this, they essentially vote on who should be a validator for the creation of blocks. The top 125 validators in the network will be the ones in charge of this.
Similar to other Proof of Stake blockchains, you can be rewarded for delegating your Atoms to a validator, with reward rates varying between different validators. Delegating works a little differently within the Cosmos network, however. Firstly when you delegate your Atoms to a validator, you cannot use these for transactions. These Atoms are essentially locked away while you are delegating them. While they are locked, these Atoms are still completely yours as no one else has access to them.
You can stop your delegation at any point you’d like. However, when you undelegate your Atoms, they will remain locked for a period of 21 days. This means you can still not make a transaction with these Atoms in this time period. If you’d like to stop your delegation to instead delegate to a different validator, there’s a way that doesn’t make you wait for 21 days. You can redelegate your Atoms in this case, which will instantly swap your delegation and the generation of rewards are swapped too, without stopping. Note that once redelegated, you cannot change your mind again from the new validator – whatever the amount – until the timelock has elapsed. If you undelegate, redelegate or delegate more to a validator, you will automatically receive your outstanding rewards without creating a transaction for it. This will be received as a cash-in: more on this later.
Another aspect where Cosmos is unique is that both validators and delegators can be punished if they don’t act appropriately. This is a process known as slashing, where the validator and delegators can lose a part of their assets if the validator misbehaves. As such, it is important to take a good look into who you are delegating your Atoms to. Ledger might provide a list of 125 validators, but in the end the person creating the delegation would be responsible for the choice. In the unfortunate event that you’d undergo such a slashing, you could lose between 0.01% and 5% of the delegated Atoms – an amount that may change in the future.
The rewards: compounding or cashing In
Delegating can be a very interesting part of the Cosmos blockchain since you can earn passive rewards from it. To gain rewards, the validator you chose must be in the top 125. Once you start your delegation to a top 125 validator, you can claim your rewards at any time. Keep in mind that for Cosmos there are fees when claiming your rewards.
There’s two different options for claiming your rewards in Cosmos: compounding and cashing in:
Compound: When choosing to compound your rewards, you will immediately add your newly received Atoms to your existing delegation and potentially gain rewards at a faster pace. This will save you on having to pay fees twice.
Cash in: When cashing in your rewards, you will receive the Atoms generated by your delegation. Unlike the compound option, these Atoms will not be delegated yet and won’t be locked. This means you could immediately use them for a transaction.
Just as a reminder, when you redelegate, undelegate or delegate more assets to a validator, your outstanding rewards will be claimed without creating a transaction. This means that there wouldn’t be a trace of this, except that it will be reflected in your balance. This automatic reward claiming can also be triggered for other reasons, in which case the ATOMs will be automatically added to your balance. Also keep in mind that if a validator drops out of the top 125, you will stop earning rewards since the validator can no longer create blocks.
Managing your ATOMs securely
Much like any other crypto asset, it is key that you store your Atoms securely. When leaving them at the hands of an exchange or other custodian, you are dependent on their security since they are holding your Atoms. Not only that, but since they hold your Atoms, they would be in control of what happens to them. As the famous expression goes, Not your Keys, Not your Coins.
With Ledger, you are securely in charge of your own Atoms. Your private key that grants access to your crypto is kept safe and offline within your Ledger hardware wallet. This means you hold the key, and you hold your own Atoms. To ensure the highest level of security, we only use the most cutting-edge secure chips known as Secure Elements.
Keep learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block video Alt Coins or Different Coins on the Block.